Key Person Life Insurance:

Protecting the Most Valuable Asset

in Your Business
This material has been prepared by Prudential to assist our producers. It is designed to provide general information in regard to the subject matter covered.
It is published with the understanding that Prudential is not providing legal, accounting or tax advice. Such services should be provided by the clients own advisors.
Prudential Financial and the Rock logo are registered service marks of The Prudential Insurance Company of America and its affiliates.
2006 The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777 ALL RIGHTS RESERVED.

IFS-A113742 Ed. 6/06 Exp. 08/08

For Internal Use Only. Not For Use With The Public.

Business Risk Management

Property
Loss

damage

or damage to inventory

Liabilities

from customers

Business

interruption

Disability

of an owner or key employee

Death

of an owner or key employee

IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

Potential Losses to the Business

Relationship
Time

damage

lost locating, hiring and training a replacement

Replacement
Employees
Projects

costs

doing double duty

put on hold

Additional

IFS-A113742 Ed.06/06 Exp. 08/08

problems

For Internal Use Only. Not for Use with the Public.

What is Key Person Life Insurance?

Insurance

purchased by the business to indemnify the

business from the losses associated with the death of a
key employee.

The

business is the owner, premium payer and policy

beneficiary

The

policy can be placed on a

Business owner
Nonowner key employee

IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

Valuing a Key Employee

Apply

a multiple of salary

Capitalize

(at a discount rate) the companys earnings

traceable to that employee

Estimate

the reduction in the going concern value of the

business due to the loss of that employee

Estimate

IFS-A113742 Ed.06/06 Exp. 08/08

the replacement costs

For Internal Use Only. Not for Use with the Public.

Valuing a Key Employee

Some

underwriting tips:

A cover letter
Include a business biography of the company and its
competitive position in its industry

Include a business biography of the key executive

Be sure to include total compensation and supporting data
Multiple needs for insurance coverage
Include other valuation methods

IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

Valuing a Key Employee

Tips

for avoiding underwriting delays

When in doubt, solicit the help of the companys financial

professionals
Third-party verification required by Prudential in business cases
where the face amount requested exceeds $10 million

IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

Term vs. Permanent Coverage

Term

Insurance

Pro: Insurance is less expensive and can be converted to

permanent coverage in the future
Con: Costs escalate at older ages
Permanent

Insurance

Pro: Cash value is an asset of the business

Con: More expensive, or is it?

IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

Permanent Coverage
Cash

value policies can do double duty

Cash value offsets premium expense

Cash value can be accessed for cash-flow needs
Funding for nonqualified retirement benefits
Provide life insurance through endorsement split dollar
Funding for buy-sell agreement
Options

for business at retirement of key executive

Bonus the policy

Sell the policy
Retain the policy
IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

Overview: Key Person Life Insurance

Adopts Plan

Business
Pays
Premiums

Key Executive

Access to Cash Value

or, at Executives
Death, Death Benefit

Life Insurance

IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

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more information?

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IFS-A113742 Ed.06/06 Exp. 08/08

For Internal Use Only. Not for Use with the Public.

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